Low Cd Rates Force Couple To Seek Options

August 26, 1985|By Tom Stieghorst, Business Writer

Dan and Miriam Stern retired to Florida after selling a family business and a duplex rental property in 1979. Until now, nearly all of their $265,000 in liquid assets has been invested in bank certificates of deposit.

Last year, they earned about $30,000 from the CDs. And Dan is quick to point out that their income in 1984 exceeded expenses by a comfortable margin.

But like many retirees in Broward and Palm Beach counties, the Sterns are troubled by the recent slide in interest rates. Their CDs that were paying 12 to 14 percent interest are now being rolled over into those paying 7 to 9 percent.

``If the interest stays down to a 7 percent level or possibly less, then our income will be pretty close to our cost of living. And if the cost of living goes up, our income will actually be less,`` said Dan.

``This is a universal problem and not just a problem for Dan Stern,`` he added.

The couple is also looking ahead to 1989, when the $6,576 annual installment payments from the sale of the duplex apartment house will end. In addition to the CD interest and the building income, the Sterns receive about $10,000 annually from Social Security, for a total income in 1984 of $46,284.

The clinic`s financial advisers agreed that the Sterns have their annual expenses of about $32,000 under control. Dan and Miriam enjoy traveling, and spent about $10,000 last year on cruises and other trips.

But the advisers suggested that the Sterns could defer some of the $8,500 they take in after expenses and taxes, in order to reduce their taxes and help offset the loss of their apartment building income four years from now.

One adviser also urged the Sterns to at least consider real estate investments as a hedge against a flare-up of inflation. With the exception of their $70,000 condominium, the couple currently has no real estate holdings.

What the Sterns are looking for are relatively simple investments, they said. ``We have practically no knowledge of the stock market,`` admitted Dan. They also want to avoid investing any of the principal they have saved over the years.

The advisers told the Sterns about several ways to achieve their goals without succumbing to the ``sticker shock`` of reduced interest rates on certificates of deposit.

Abers thinks the Sterns are in an ``manageable`` tax bracket and their concern should be with the consistency and safety of income and principal. However, he recommended they set aside $75,000 to $100,000 for a tax-deferred, single-premium annuity to put more of their money to work, and to prepare for the end of their installment income in 1989.

The annuity would produce no current income for five years. Under a split funding option, the Sterns can continue to recieve high income from a portion of the annuity while the remaining balance continues to compound at a competitive rate with zero risk to principal.

Diversity is the key to any further CD investment, Abers emphasized. He advised dividing $125,000 into five CDs with maturities from one to five years.

Another $25,000 could be earmarked for a mutual fund investing in Ginnie Mae obligations of the Government National Mortgage Association. Such funds have been paying rates of 11.75 to 12.25 percent.

Above all, Abers told the Sterns to avoid the advice of friends who offer predictions about the economy. ``You shouldn`t listen to opinions; you should listen to facts,`` he said. ``And the facts are that there isn`t one person in the world who can predict where interest rates are going to go.``

-- James B. Birmingham, limited partner, Edward D. Jones & Co., Fort Lauderdale. Birmingham said the Sterns will find no easy answer to the income squeeze they will experience as CD rates decline and the income from their building sale dries up. Since they are fairly inexperienced investors, he said their smartest move would be to find a good investment adviser and to stick to investments they feel comfortable with.

More specifically, Birmingham strongly advised them to stay with high-quality CDs, such as those from First National Citibank, which are currently paying about 10 percent. That`s acceptable if rates stay low. If not, CDs are fairly liquid, and the Sterns could pull out, with a three-month interest penalty, to take advantage of higher rates.

Birmingham also favors tax-free AAA insured bonds, and urged the couple to consider shifting some of their assets to them, especially if returns improve to the 12 percent range.

Currently, better alternatives could be government bonds, U.S. Treasury securities or mutual funds specializing in government securities, he said.

If the Sterns decide on a government fund, investing through a group of funds would give them flexibility to switch to a tax-free fund or a money market instrument, if the market changes, he added.